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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission File No. 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 93-0976127
(State or other jurisdiction of (I.R.S. Employee Identification
Incorporation or organization) Number)
300 Knightsbridge Parkway
Lincolnshire, IL 60069
847-478-4200
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No[X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No[X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of common stock outstanding at May 26, 2004: 29,757,310
1
Introductory Note
This quarterly report on Form 10-Q relates to the quarter ended September 30,
2003. We did not file a report on Form 10-Q for this period previously because
we have only recently completed our financial statements for this period.
As we have previously disclosed in prior reports, including most recently in our
quarterly report on Form 10-Q for the quarter ended June 30, 2003 filed on May
14, 2004, we were not able to complete our financial statements for 2002 and
2003 until we resolved the appropriate accounting treatment with respect to
certain transactions that occurred in 2000 and 2001. The transactions in
question involved the formation of and certain transactions with Mobile
Satellite Ventures LP, or MSV, in 2000 and 2001 and the sale of certain of our
transportation assets to Aether Systems, Inc. in 2000. We have resolved these
accounting issues and, on March 22, 2004, we filed our annual report on Form
10-K for the year ended December 31, 2002, as well as our quarterly reports on
Form 10-Q for the quarters ended June 30, 2002 and September 30, 2002.
Concurrently with the filing of these reports, we also filed an amendment to our
quarterly report on Form 10-Q for the quarter ended March 31, 2002 to reflect
restated financial statements for such period. After completion of our annual
and quarterly reports for fiscal year 2002, we subsequently filed our quarterly
reports on Form 10-Q for the quarters ended March 31 and June 30, 2003 on April
26 and May 14, 2004, respectively.
We recently completed our financial statements for the quarter ended September
30, 2003 and those financial statements are included in this report. The 2002
comparative financial statements provided herein have been restated (see Note 2
of notes to consolidated financial statements, "Significant Accounting Policies
- - Restatement of Financial Statements" and Note 6, "Subsequent Events").
There have been a number of significant developments regarding Motient's
business, operations, financial condition, liquidity, and outlook subsequent to
September 30, 2003. Information regarding such matters is contained in this
report in Note 6 ("Subsequent Events") of notes to consolidated financial
statements.
On January 10, 2002, we filed for protection under Chapter 11 of the Bankruptcy
Code. Our Amended Joint Plan of Reorganization was filed with the United States
Bankruptcy Court for the Eastern District of Virginia on February 28, 2002. The
plan was confirmed on April 26, 2002, and became effective on May 1, 2002. In
the consolidated financial statements provided herein, all results for periods
prior to May 1, 2002 are referred to as those of the "Predecessor Company" and
all results for periods including and subsequent to May 1, 2002 are referred to
as those of the "Successor Company". Due to the effects of the "fresh start"
accounting, results for the Predecessor Company and the Successor Company are
not comparable (See Note 2 of notes to consolidated financial statements,
"Significant Accounting Policies").
References in this report to "Motient" and "we" or similar or related terms
refer to Motient Corporation and its wholly-owned subsidiaries together, unless
the context of such references requires otherwise.
2
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Nine Months 4
Ended September 30, 2003 (Successor Company), the Four Months Ended
April 30, 2002 (Predecessor Company) and the Three and Five
Months Ended September 30, 2002 (Successor Company)
Consolidated Balance Sheets as of September 30, 2003 (Successor Company) 5
and December 31, 2002 (Successor Company)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 (Successor Company), the Four 6
Months Ended April 30, 2002 (Predecessor Company) and the Five
Months Ended September 30, 2002 (Successor Company), and
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results 40
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 63
Item 4. Controls and Procedures 63
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 68
Item 3. Defaults Upon Senior Securities 68
Item 6. Exhibits and Reports on Form 8-K 68
3
PART I- FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Successor Successor Successor Successor Predecessor
Company Company Company Company Company
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
REVENUES
Services and related revenue $10,662 $12,953 $38,209 $21,539 $16,809
Sales of equipment 1,389 344 3,204 477 5,564
----- --- ----- --- -----
Total revenues 12,051 13,297 41,413 22,016 22,373
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of services and operations (including 12,461 14,233 39,999 24,359 21,909
stock-based compensation of $24 and $426 for
the three months and nine months ended
September 30, 2003; exclusive of depreciation
and amortization below)
Cost of equipment sold (exclusive of 1,485 438 3,607 1,258 5,980
depreciation and amortization below)
Sales and advertising (including stock-based 1,065 1,754 3,782 3,163 4,287
compensation of $42 and $304 for the three
months and nine months ended September 30, 2003)
General and administrative (including 3,846 3,027 10,393 6,360 4,130
stock-based compensation of $10 and $487 for
the three months and nine months ended
September 30, 2003 and non-cash
consulting expense of $927 for the
three months and nine months ended September
30, 2003)
Restructuring Charge -- 25 -- 25 584
Depreciation and amortization 5,454 5,949 16,312 10,057 6,913
----- ----- ------ ------ -----
Operating loss (12,260) (12,129) (32,680) (23,206) (21,430)
-------- -------- -------- -------- --------
Interest expense, net (1,638) (575) (4,592) (983) (1,850)
Other income, net 192 -- 2,775 15 1,270
Gain (Loss) on disposal of assets 51 (1,193) 51 (1,193) (591)
(Loss) on impairment of intangible asset (5,535) -- (5,535) -- --
Gain on sale of transportation assets -- -- ---- -- 372
Equity in loss of XM Radio and Mobile Satellite
Ventures (3,155) (2,747) (7,768) (4,287) (1,909)
------- ------- ------- ------- -------
(Loss) before reorganization items (22,345) (16,644) (47,749) (29,654) (24,138)
-------- -------- -------- -------- --------
Reorganization items:
Costs associated with debt restructuring -- -- ---- -- (22,324)
Gain on extinguishment of debt -- -- ---- -- 183,725
Gain on fair market adjustment of assets -- -- ---- -- 94,715
------
Net (loss) income $(22,345) $(16,644) $(47,749) $(29,654) $231,978
========= ========= ========= ========= ========
Basic and Diluted (Loss) income Per Share of
Common Stock:
Net (Loss) income, basic and diluted $(0.89) $(0.66) $(1.90) $(1.18) $3.98
======= ======= ======= ======= =====
Weighted-Average Common Shares Outstanding - basic
and diluted 25,170 25,097 25,128 25,097 58,251
====== ======== ====== ======== =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
Successor Successor
Company Company
September 30, 2003 December 31, 2002
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $2,843 $5,840
Short-term investments -- 50
Accounts receivable-trade, net of allowance for doubtful accounts of
$1,418 at September 30, 2003 and $1,003 at December 31, 2002 4,937 9,339
Restricted investments -- 554
Inventory 526 1,077
Due from Mobile Satellite Ventures, net 72 234
Deferred equipment costs 4,272 2,755
Assets held for sale 3,366 --
Other current assets 5,684 6,796
----- -----
Total current assets 21,700 26,645
------ ------
RESTRICTED INVESTMENTS 806 --
PROPERTY AND EQUIPMENT, net 35,849 46,405
FCC LICENSES AND OTHER INTANGIBLES, net 79,784 94,921
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 24,725 32,493
DEFERRED CHARGES AND OTHER ASSETS 9,417 1,757
----- -----
Total assets $172,281 $202,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $13,696 $13,040
Deferred equipment revenue 4,310 2,861
Deferred revenue and other current liabilities 8,445 5,308
Vendor financing commitment, current 1,020 1,020
Obligations under capital leases, current 2,031 3,031
----- -----
Total current liabilities 29,502 25,260
------ ------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 2,103 3,219
Vendor financing commitment, net of current portion 4,014 4,927
Notes payable, including accrued interest thereon 22,381 20,943
Term credit facility, including accrued interest thereon 4,664 --
Other long-term liabilities 1,961 4,824
----- -----
Total long-term liabilities 35,123 33,913
------ ------
Total liabilities 64,625 59,173
------ ------
STOCKHOLDERS' EQUITY:
Preferred Stock; par value $0.01; authorized 5,000,000 shares at
September 30, 2003 and December 31, 2002, no shares issued or
outstanding at September 30, 2003 or December 31, 2002 -- --
Common Stock; voting, par value $0.01; 100,000,000 shares authorized
and 25,175,434 and 25,097,256 shares issued and outstanding at
September 30, 2003 and at December 31, 2002 252 251
Additional paid-in capital 199,219 197,814
Common stock purchase warrants 15,492 4,541
Accumulated deficit (107,307) (59,558)
--------- --------
STOCKHOLDERS' EQUITY 107,656 143,048
------- -------
Total liabilities and stockholders' equity $172,281 $202,221
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
Motient Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Successor Successor Predecessor
Company Company Company
Nine Months Five Months Four Months
Ended September 30, Ended September 30, Ended April 30,
2003 2002 2002
(Unaudited) (Unaudited) (Audited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (4,175) $(11,874) $(14,546)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term and restricted investments (202) (50) --
Proceeds from the sale of assets -- 616 --
Proceeds from the sale of transportation assets -- -- 372
Investment in MSV -- (957) --
Additions to property and equipment -- (299) (494)
-------- -------- --------
Net cash (used in) provided by investing activities (202) (690) (122)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities -- -- 17
Proceeds from issuance of equity securities to 401(k) 190
Principal payments under capital leases (2,116) (1,334) (1,273)
Principal payments under Vendor Financing (657) -- --
Proceeds from Term Credit Facility 4,500 -- --
Debt issuance costs (537) -- --
-------- -------- --------
Net cash (used in) provided by financing activities 1,380 (1,334) (1,256)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,997) (13,898) (15,924)
CASH AND CASH EQUIVALENTS, beginning of period 5,840 17,463 33,387
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,843 $ 3,565 $ 17,463
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way mobile communications services principally to business-to-business
customers and enterprises. Motient serves a variety of markets including mobile
professionals, telemetry, transportation and field service. Motient provides its
eLink SM brand two-way wireless email services to customers accessing email
through corporate servers, Internet Service Providers, Mail Service Provider
accounts, and paging network service providers. Motient also offers BlackBerry
TM by Motient, a wireless email solution developed by Research In Motion Ltd.
("RIM") and licensed to operate on Motient's network. BlackBerry TM by Motient
is designed for large corporate accounts operating in a Microsoft Exchange(R) or
Lotus Notes(R) environment. The Company considers the two-way mobile
communications service described in this paragraph to be its core wireless
business.
Motient has six wholly-owned subsidiaries and a 29.5% interest (on a
fully-diluted basis) in Mobile Satellite Ventures LP ("MSV"). For further
details regarding Motient's interest in MSV, please see "- Mobile Satellite
Ventures LP" below and Note 6 ("Subsequent Events -- Developments Relating to
MSV"). Motient Communications Inc. ("Motient Communications") owns the assets
comprising Motient's core wireless business, except for Motient's Federal
Communications Commission ("FCC") licenses, which are held in a separate
subsidiary, Motient License Inc. ("Motient License"). Motient License is a
special purpose wholly-owned subsidiary of Motient Communications that holds no
assets other than Motient's FCC licenses. Motient's other four subsidiaries hold
no material operating assets other than the stock of other subsidiaries and
Motient's interests in MSV. On a consolidated basis, we refer to Motient
Corporation and its six wholly-owned subsidiaries as "Motient."
Motient is devoting its efforts to expanding its core wireless business, while
also focusing on cost-cutting efforts. These efforts involve substantial risk.
Future operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies.
Depending on their extent and timing, these factors, individually or in the
aggregate, could have an adverse effect on the Company's financial condition and
future results of operations. In recent periods, certain factors have placed
significant pressures on Motient's financial condition and liquidity position.
These factors also restrained Motient's ability to accelerate revenue growth at
the pace required to enable it to generate cash in excess of its operating
expenses. These factors include competition from other wireless data suppliers
and other wireless communications providers with greater resources, cash
constraints that have limited Motient's ability to generate greater demand,
unanticipated technological and development delays and general economic factors.
Motient's results in recent periods, including the period covered by this
report, have also been hindered by the downturn in the economy and capital
markets. These factors contributed to the Company's decision in January 2002 to
file a voluntary petition for reorganization under Chapter 11 of the United
States Federal Bankruptcy Code. Motient's Plan of Reorganization was confirmed
on April 26, 2002 and became effective on May 1, 2002. See Note 2 ("Significant
Accounting Policies -- Motient's Chapter 11 Filing and Plan of Reorganization
and "Fresh-Start" Accounting") below.
7
For a discussion of certain significant recent developments and trends in
Motient's business after the end of the period covered by this report, please
see Note 6 ("Subsequent Events"). The financial results for the period January
1, 2002 to April 30, 2002 are herein referred to as "Predecessor Company"
results and the financial results for all periods after April 30, 2002 are
referred to as "Successor Company" results.
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, Mobile
Satellite Ventures LP (formerly known as Mobile Satellite Ventures LLC) ("MSV"),
in which it owned, until November 26, 2001, 80% of the membership interests, in
order to conduct research and development activities. In June 2000, three
investors unrelated to Motient purchased 20% of the interests in MSV for an
aggregate price of $50 million. The minority investors had certain participating
rights which provided for their participation in certain business decisions that
were made in the normal course of business, therefore, the Company's investment
in MSV has been recorded for all periods presented in the consolidated financial
statements pursuant to the equity method of accounting. On November 26, 2001,
Motient sold the assets comprising its satellite communications business to MSV,
as part of a transaction in which certain other parties joined MSV, including
TMI Communications and Company Limited Partnership ("TMI"), a Canadian satellite
services provider. In this transaction, TMI also contributed its satellite
communications business assets to MSV. As part of this transaction, Motient
received, among other proceeds, a $15 million promissory note issued by MSV and
purchased a $2.5 million convertible note issued by MSV.
In July 2002, MSV commenced a rights offering seeking total funding in the
amount of $3.0 million. While the Company was not obligated to participate in
the offering, the Company's board determined that it was in the Company's best
interests to participate so that its interest in MSV would not be diluted. On
August 12, 2002, the Company funded an additional $957,000 to MSV pursuant to
this offering, and received a new convertible note in such amount. This rights
offering did not impact the Company's ownership position in MSV.
In January 2001, MSV had filed a separate application with the FCC with respect
to MSV's plans for a new generation satellite system utilizing ancillary
terrestrial components, or "ATC". In January 2003, MSV's application with the
FCC with respect to MSV's plans for a new generation satellite system utilizing
ATC was approved by the FCC. The order granting such approval (the "ATC Order")
requires that licensees, including MSV, submit a further application with the
FCC to seek approval of the specific system incorporating ATC that the licensee
intends to use. MSV has filed an application for ATC authority, pending the
FCC's final rules and regulations. MSV has also filed a petition for
reconsideration with respect to certain aspects of the ATC Order. In January
2004, certain terrestrial wireless providers petitioned the U.S. Court of
Appeals for the District of Columbia to review the FCC's decision to grant ATC
to satellite service providers. Oral arguments in this case were scheduled for
May 2004.
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to the
Company's promissory note. Under the terms of MSV's amended and restated
investment agreement, these investors had the option of investing an additional
$17.6 million in MSV by December 31, 2003; however, if, prior to this time, the
FCC had not issued a decision addressing MSV's petition for reconsideration with
respect to the ATC Order, the option was automatically extended to March 31,
2004. As of the closing of the initial investment on August 21, 2003 and as of
September 30, 2003, the Company's percentage ownership of MSV was approximately
46.5% on an undiluted basis, 32.6% on an "as converted" basis giving effect to
the conversion of all outstanding convertible notes of MSV and 29.5% on a fully
diluted basis.
8
For a discussion of certain additional recent developments regarding MSV,
including recent investments in MSV, please see Note 6 ("Subsequent Events").
New Network Offerings
On May 21, 2003 Motient entered into an authorized agency agreement with Verizon
Wireless. Previously, on March 1, 2003, Motient had entered into a national
premier dealer agreement with T-Mobile USA. These agreements allow Motient to
sell each of T-Mobile's third generation global system for GSM/GPRS, network
subscriptions and Verizon's third generation CDMA/1XRTT network subscriptions
nationwide. Motient is paid for each subscriber put onto either network. Each
agreement allows Motient to continue to actively sell and promote wireless email
and wireless Internet applications to enterprise accounts on networks with
greater capacity and speed, and that are voice capable.
Cost Reduction Actions
Since emerging from bankruptcy in May 2002, several factors have restrained the
Company's ability to grow revenue at the rate it previously anticipated. These
factors include the weak economy generally and the weak telecommunications and
wireless sector specifically, the financial difficulty of several of the
Company's key resellers, on whom it relies for a majority of its new revenue
growth, and the Company's continued limited liquidity.
The Company has taken a number of steps to reduce operating and capital
expenditures in order to lower its cash burn rate and improve its liquidity
position.
Reductions in Workforce. The Company undertook several reductions in its
workforce, including in March 2003 and February 2004. These actions eliminated
approximately 10% (19 employees) and 32.5% (54 employees), respectively, of its
then-remaining workforce. In the aggregate, the Company has reduced its
workforce by approximately 39% since December 31, 2002 and reduced employee and
related expenditures by approximately $0.5 million per month.
Refinancing of Vendor Obligations. During the fourth quarter of 2002 and the
first quarter of 2003, the Company renegotiated several of its key vendor and
customer arrangements in order to reduce recurring expenses and improve its
liquidity position. In some cases, the Company was able to negotiate a flat rate
reduction for continuing services provided to it by its vendors or a deferral of
payable amounts, and in other cases the Company renegotiated the scope of
services provided in exchange for reduced rates or received pre-payments for
future services. The Company continues to aggressively pursue further vendor
cost reductions where opportunities arise.
In January 2003, the Company negotiated a deferral of approximately $2.6 million
that was owed to Motorola for maintenance services provided pursuant to the
Company's service agreement with Motorola. The Company issued a promissory note
to Motorola for such amount, with the note to be paid off over a two-year period
beginning in January 2004. Also in January 2003, the Company restructured
certain of its vendor obligations to Motorola. The remaining principal
obligation of approximately $3.3 million under this facility was restructured
such that the outstanding amount will be paid off in equal monthly installments
over a three-year period from January 2003 to December 2005. In March 2004, the
amortization for both of these obligations was reduced to $100,000 in aggregate,
9
effectively extending the amortization period for both obligations. As part this
restructuring, Motient pledged all of the outstanding stock of Motient License,
on a second priority basis, to secure the borrowings under the Motorola
promissory note and vendor financing.
In the first quarter of 2003, the Company also restructured certain of its
capital lease obligations with Hewlett-Packard Corporation to significantly
reduce the monthly amortization requirements of these facilities on an on-going
basis. As part of such negotiations, the Company agreed to fund a letter of
credit in twelve monthly installments during 2003, in the aggregate amount of
$1.125 million, to secure certain payment obligations. This letter of credit
will be released to the Company in fifteen monthly installments beginning in
July 2004, assuming no defaults have occurred and are occurring.
As of April 30, 2004, the aggregate principal amount of the Company's
obligations to Motorola under these facilities was approximately $4.3 million,
and the aggregate principal amount of its obligations to Hewlett-Packard was
approximately $2.9 million. See Note 3 ("Liquidity and Financing") for further
discussion of these financing obligations.
Despite these initiatives, we continue to be cash flow negative, and there can
be no assurances that we will ever be cash flow positive. See Note 6
("Subsequent Events") for discussion of additional cost reduction actions taken
by the Company subsequent to the end of the period covered by this report.
Changes in Management
On January 17, 2003, David H. Engvall resigned as senior vice president, general
counsel and secretary.
On March 18, 2003, Brandon Stranzl resigned from the board of directors.
On March 20, 2003, Patricia Tikkala resigned as vice president and chief
financial officer.
On April 17, 2003, the board of directors elected Christopher W. Downie to the
position of vice president, chief financial officer and treasurer. Mr. Downie
had previously been a consultant with Communication Technology Advisors LLC
("CTA"), working on Motient matters, since May 2002.
On June 20, 2003, Jared Abbruzzese resigned his position as chairman of the
board. Steven Singer was elected chairman of the board and a new director, Peter
Aquino, was elected to the board. Mr. Aquino is a senior managing director for
CTA.
See Note 6 ("Subsequent Events") for discussion of additional management changes
at the Company subsequent to the end of the period covered by this report.
Change in Accountants
On April 17, 2003, the Company dismissed PricewaterhouseCoopers LLP as its
independent auditors, effective upon the completion of services related to the
audit of the Company's consolidated financial statements for the period May 1,
2002 to December 31, 2002.
Also on April 25, 2003, the Company's board of directors approved the engagement
of Ehrenkrantz Sterling & Co. LLC as its independent auditors to (i) re-audit
10
the Company's consolidated financial statements for the fiscal year ended
December 31, 2000 and the fiscal year ended December 31, 2001, and (ii) audit
the Company's consolidated financial statements for the interim period from
January 1, 2002 to April 30, 2002, and the fiscal year ended December 31, 2003.
See Note 6 ("Subsequent Events") for discussion of additional changes in
accountants subsequent to the end of the period covered by this report. For
further details regarding the change in accountants, please see the Company's
current report on Form 8-K filed with the SEC in April 23, 2003 and the
Company's amendment to current report on Form 8-K/A filed with the SEC on March
9, 2004.
Research In Motion Matters
On June 26, 2003, RIM provided the Company with a written End of Life
Notification for the RIM 857 wireless handheld device. This means that RIM will
no longer produce this model of handheld device. The last date for accepting
orders was September 30, 2003, and the last date for shipment of devices was
January 2, 2004. Motient continues to order limited quantities of RIM 857
wireless devices from RIM and Motient has implemented a RIM 857 "equivalent to
new" program. Motient expects that there will be sufficient returned RIM 857s to
satisfy demand for the foreseeable future. During the year ended December 31,
2002 and for the nine months ended September 30, 2003, a majority of Motient's
equipment revenues were attributable to sales of the RIM 857 device, and Motient
estimates that approximately 35% and 49%, respectively, of its monthly recurring
service revenues were derived from wireless messaging that use RIM 857 devices.
Since January 2004, the purchase by the Company and sale of RIM 857 wireless
handheld devices on Motient's network has declined significantly.
See Note 5 ("Legal Matters") for discussion of additional legal matters
pertaining to RIM.
Sale of SMR Licenses to Nextel Communications, Inc.
On July 29, 2003, Motient's wholly-owned subsidiary, Motient Communications,
entered into an asset purchase agreement with Nextel, under which Motient
Communications sold to Nextel certain of its SMR licenses issued by the FCC for
$3.4 million. Motient recorded the transaction in July, 2003 in accordance with
SFAS 144 as an asset held for sale; immediately discontinuing the amortization
of the identified SMR licenses. The closing of this transaction occurred on
November 7, 2003.
See Note 6 ("Subsequent Events") for discussion of additional sales by the
Company of certain of its SMR licenses subsequent to the end of the period
covered by this report.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared by the Company and are
unaudited. The results of operations for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results to be expected
for any future period or for the full fiscal year. In the opinion of management,
all adjustments (consisting of normal recurring adjustments unless otherwise
indicated) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 2003, and for all periods presented
have been made. Footnote disclosure has been condensed or omitted as permitted
in interim financial statements.
11
Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start"
Accounting
On January 10, 2002, the Company filed for protection under Chapter 11 of the
Bankruptcy Code. The Company's Amended Joint Plan of Reorganization was filed
with the United States Bankruptcy Court for the Eastern District of Virginia on
February 28, 2002. The cases were jointly administered under the case name "In
Re Motient Corporation, et. al.," Case No. 02-80125. The Company's Plan of
Reorganization was confirmed on April 26, 2002 and the Company's emergence from
bankruptcy became effective on May 1, 2002 (the "Effective Date"). The Company
adopted "fresh start" accounting as of May 1, 2002 in accordance with procedures
specified by AICPA Statement of Position ("SOP") No. 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code". The Company determined
that its selection of May 1, 2002 versus April 26, 2002 for the "fresh-start"
date was more convenient for financial reporting purposes and that the results
for the period from April 26, 2002 to May 1, 2002 were immaterial to the
consolidated financial statements. All results for periods prior to the
Effective Date are referred to as those of the "Predecessor Company" and all
results for periods including and subsequent to the Effective Date are referred
to as those of the "Successor Company."
In accordance with SOP No. 90-7, the reorganized value of the Company was
allocated to the Company's assets based on procedures specified by Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". Each
liability existing at the plan confirmation date, other than deferred taxes, was
stated at the present value of the amounts to be paid at appropriate market
rates. It was determined that the Company's reorganization value computed
immediately before the Effective Date was $234 million. Subsequent to the
determination of this value, the Company determined that the reorganization
value ascribed to MSV did not reflect certain preference rights on liquidation
available to certain equity holders in MSV. Therefore, the reorganization value
of MSV was reduced by $13 million and the Company's reorganization value was
reduced to $221 million. The Company adopted "fresh-start" accounting because
holders of existing voting shares immediately before filing and confirmation of
the plan received less than 50% of the voting shares of the emerging entity and
its reorganization value is less than its postpetition liabilities and allowed
claims, as shown below:
Postpetition current liabilities $49.9 million
Liabilities deferred pursuant to chapter 11 proceedings 401.1 million
-------------
Total postpetition liabilities and allowed claims 451.0 million
Reorganization value (221.0 million)
---------------
Excess of liabilities over reorganization value $(230.0 million)
================
The reorganization value of Motient was determined by considering several
factors and by reliance on various valuation methods. For the valuation of the
core wireless business, consideration was given to discounted cash flows and
price/earnings and other applicable ratios, a liquidation value analysis,
comparable company trading multiples, and comparable acquisition multiple
analysis. The factors considered by Motient included the following:
o Forecasted operating cash flow results which gave effect to the
estimated impact of limitations on the use of available net operating
loss carryovers and other tax attributes resulting from the Plan of
Reorganization and other events,
o The discounted residual value at the end of the forecast period based
on the capitalized cash flows for the last year of that period,
o Market share and position,
o Competition and general economic considerations,
o Projected sales growth, and
o Working capital requirements.
12
For the valuation of the Company's investment in MSV, consideration was given to
the valuation of MSV's equity reflected by recent arms-length investments in
MSV, subsequently adjusted as discussed above.
After consideration of the Company's debt capacity, and after extensive
negotiations among parties in interest, it was agreed that Motient's
reorganization capital structure should be as follows:
Notes payable to Rare Medium and CSFB $19.8 million
Stockholders' Equity 201.2 million
--------------
$221.0 million
==============
The Company allocated the $221.0 million reorganization value among its net
assets based upon its current estimates of the fair value of its assets. In the
case of current assets, with the exception of inventory, the Company concluded
that their carrying values approximated fair values. The values of the Company's
frequencies and its investment in and note receivable from MSV were based on
independent analyses presented to the bankruptcy court and subsequently adjusted
as discussed above. The value of the Company's fixed assets was based upon a
recent valuation of the Company's software and estimates of replacement cost for
network and other equipment, for which the Company believes that its recent
purchases represent a valid data point. The value of the Company's other
intangible assets was based on third party valuations as of May 1, 2002.
In February 2003, the Company engaged a financial advisory firm to prepare a
valuation of software and customer intangibles. Software and customer
intangibles were not taken into consideration when the original fresh-start
balance sheet was determined at May 1, 2002. The changes for the software and
customer contracts are reflected below and in the financial statements and notes
herein.
The effect of the plan of reorganization and application of "fresh-start"
accounting on the Predecessor Company's balance sheet as of April 30, 2002, is
as follows:
13
Debt
Preconfirmation Discharge Reorganized
Predecessor and Exchange Fresh Start Successor
(in thousands) Company(j) of Stock Adjustments Company
---------- -------- ----------- -------
Assets:
Current assets
Cash $17,463 $17,463
Receivables 10,121 10,121
Inventory 8,194 (4,352) 3,842
Deferred equipment costs 11,766 (11,766) (e) --
Other current assets 11,443 11,443
------ ------ ------
Total current assets 58,987 (16,118) 42,869
Property and equipment 58,031 (1,553) (i) 56,478
FCC Licenses and other intangibles 45,610 56,866 (f)(i) 102,476
Goodwill 4,981 (4,981) (i) --
Investment in and notes receivable from MSV 27,262 26,593 (f) 53,855
Other long-term assets 2,864 (1,141) (e) 1,723
----- ------- -----
Total Assets $197,735 $59,666 $257,401
======== ======= ========
Liabilities & Stockholders' (Deficit) Equity
Liabilities Not Subject to Compromise:
Current liabilities:
Current maturities of capital leases $4,096 $4,096
Accounts payable - trade 1,625 1,625
Vendor financing 655 655
Accrued expenses 15,727 15,727
Deferred revenue 23,284 (18,913) (g)(e) 4,371
------ -------- ------
45,387 (18,913) 26,474
Long term liabilities:
Vendor financing 2,661 2,661
Capital lease obligation 3,579 3,579
Deferred revenue 19,931 (16,136) (e)(g) 3,795
Liabilities Subject to Compromise:
Prepetition liabilities 8,785 (8,785) (a) --
Senior note, including accrued interest thereon 367,673 (367,673) (b) --
Rare Medium Note, including accrued interest thereon 27,030 (27,030) (c) --
------ ------- -------- ----------
403,488 (403,488) --
Rare Medium and CSFB Notes -- 19,750 (a)(c) 19,750
---------- ------ -------- ------
Total liabilities 475,046 (383,738) (35,049) 56,259
Stockholders' (deficit) equity:
Common stock - old 584 (584) (h) --
Common stock - new 251 (d) 251
Additional paid-in capital 988,531 (988,531)
197,814 (d)(h) 197,814
Common stock purchase
warrants - old 93,730 (93,730) (h)
Common stock purchase
warrants - new 3,077 (d) 3,077
Deferred stock compensation (336) 336 (h) --
Retained (deficit) earnings (1,359,820) 1,359,820 94,715 --
----------- (183,725) ------ ----------
(94,715) (d)(h)
183,725 (h)
Stockholders' Equity (Deficit) (277,311) 383,738 94,715 201,142
--------- ------- ------ -------
Total Liabilities & Stockholders' Equity (Deficit) $197,735 $ -- $59,666 $257,401
======== ========= ======= ========
14
(a) Represents the cancellation of the following liabilities:
i. Amounts due to Boeing $1,533
ii. Amounts due to CSFB 2,000
iii. Amounts due to JP Morgan Chase 1,550
iv. Amounts due to Evercore Partners LP ("Evercore") 1,948
v. Amounts due to the FCC 1,003
vi. Other amounts 751
------
$8,785
Liabilities were cancelled in exchange for the following:
a. 97,256 shares of new Motient common stock,
b. a note to CSFB in the amount of $750 and
c. a warrant to Evercore Partners to purchase 343,450 shares of new
Motient common stock, and
d. a note to Rare Medium in the amount of $19,000.
(b) Represents the cancellation of the senior notes in the amount of $367,673,
including interest threron, in exchange for 25,000,000 shares of new
Motient common stock. Certain of the Company's other creditors received an
aggregate of 97,256 shares of the Company's common stock in settlement for
amounts owed to them.
(c) Represents the cancellation of $27,030 of notes due to Rare Medium,
including accrued interest thereon, in exchange for a new note in the
amount of $19,000. The Company also issued CSFB a note in the principal
amount of $750 for certain investment banking services.
(d) Represents the issuance of the following:
i. 25,097,256 shares of new Motient common stock.
ii. warrants to the holders of pre-reorganization common stock
to purchase an aggregate of approximately 1,496,512 shares
of common stock, with such warrants being valued at
approximately $1,100.
iii. a warrant to purchase up to 343,450 shares of common stock
to Evercore, valued at approximately $1,900. The retained
earnings adjustment includes the gain on the discharge of
debt of $183,725.
(e) Represents the write off of deferred equipment costs of $12,907 and
deferred equipment revenue of $12,907 since there is no obligation to
provide future service post "fresh-start".
(f) To reflect the step-up in assets in accordance with the reorganization
value and valuations performed.
(g) Represents the write off of the deferred gain associated with the Company's
sale of its satellite assets to MSV in November 2001 and the write-off of
the unamortized balance of the $15,000 perpetual license sold to Aether in
November 2000, both of which total approximately $22,142, since there is no
obligation to provide future service post-"fresh-start".
(h) To record the cancellation of the Company's pre-reorganization equity and
to reverse the gain on extinguishment of debt of $183,725 and the gain on
fair market adjustment of $94,715.
(i) To record the valuation and resulting increase of customer intangibles of
approximately $11,501 and frequencies of $45,365. The reduction of $4,981
is due to a write-off of goodwill. The reduction of property and equipment
relates to a subsequent reduction in the carrying value of certain software
from $4,942 to $3,389 and the reduction to inventory from $8,194 to $3,842
to its net realizable value.
(j) The balances do not match the balances in the Company's Plan of
Reorganization due to subsequent audit adjustments.
Under the Plan of Reorganization, all then-outstanding shares of the Company's
pre-reorganization common stock and all unexercised options and warrants to
purchase the Company's pre-reorganization common stock were cancelled. The
holders of $335 million in senior notes exchanged their notes for 25,000,000
shares of the Company's new common stock. Certain of the Company's other
creditors received an aggregate of 97,256 shares of the Company's new common
stock in settlement for amounts owed to them. These shares were issued following
completion of the bankruptcy claims process; however, the value of these shares
has been recorded in the financial statements as if they had been issued on the
effective date of the reorganization. Holders of the Company's
pre-reorganization common stock received warrants to purchase an aggregate of
approximately 1,496,512 shares of common stock. The conditions necessary for the
warrants to be exercisable were never met prior to May 1, 2004. Therefore, the
15
warrants expired under their own terms on such date. Also, in July 2002, Motient
issued to Evercore, financial advisor to the creditors' committee in Motient's
reorganization, a warrant to purchase up to 343,450 shares of common stock, at
an exercise price of $3.95 per share. The warrant was dated May 1, 2002, and has
a term of five years. If the average closing price of Motient's common stock for
thirty consecutive trading days is equal to or greater than $20.00, Motient may
require Evercore to exercise the warrant, provided the common stock is then
trading in an established public market. The value of this warrant has been
recorded in the financial statements as if it had been issued on May 1, 2002.
Further details regarding the plan are contained in Motient's disclosure
statement with respect to the plan, which was filed as Exhibit 99.2 to the
Company's current report on Form 8-K dated March 4, 2002.
Restatement of Financial Statements
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2002 and years ended December 31, 2000 and 2001, the Company
became aware that certain accounting involving the effects of several complex
transactions from these years, including the formation of and transactions with
a joint venture, MSV, in 2000 and 2001 and the sale of certain of our
transportation assets to Aether in 2000, required revision. In addition, as a
result of the Company's re-audit of the years ended December 31, 2001 and 2000
performed by the Company's current independent accounting firm, Friedman LLP,
successor-in-interest to Ehrenkrantz Sterling & Co. LLC, certain accounting
adjustments were proposed and accepted by the Company. A description of these
adjustments is provided below.
Summary of Adjustments to Prior Period Financial Statements with respect to MSV
and Aether Transactions
The following is a brief description of the material differences between our
original accounting treatment with respect to the MSV and Aether transactions
and the revised accounting treatment that we have concluded was appropriate and
has been reflected in the accompanying financial statements for the respective
periods.
Allocation of initial proceeds from MSV formation transactions in June 2000. In
the June 2000 transaction with MSV, Motient Services received $44 million from
MSV. This amount represented payments due under a research and development
agreement, a deposit on the purchase of certain of Motient's assets at a future
date, and payment for a right for certain of the investors in MSV to convert
their ownership in MSV into shares of common stock of Motient. Since the
combined fair value of the three components exceeded $44 million, based on
valuations of each component, Motient initially allocated the $44 million of
proceeds first to the fair value of the research and development agreement and
then the remaining value to the asset deposit and investor conversion option
based on their relative fair values. Upon review, Motient revised its initial
accounting treatment and allocated the $44 million of proceeds first to the
investor conversion option based on its fair value, and the remainder to the
research and development agreement and asset deposit based on their relative
fair values. The effect of this reallocation increased shareholders' equity at
the time of the initial recording by $12 million, as well as reduced subsequent
service revenue by $2.3 million and $4 million in 2000 and 2001, respectively,
as a result of the lower recorded value allocated to the research and
development agreement. All remaining unamortized balances were written off as
part of the gain on the sale of the satellite assets.
Recording of suspended losses associated with MSV in fourth quarter of 2001.
When the November 2001 sale of the assets of MSV was consummated, Motient and
MSV amended the asset purchase agreement, with Motient agreeing to take a $15
million note as part of the consideration for the sale of the assets to MSV.
Additionally, at the time of this transaction, Motient purchased a $2.5 million
convertible note issued by MSV. As Motient had no prior basis in its investment
in MSV, Motient had not recorded any prior equity method losses associated with
its investment in MSV. When Motient agreed to take the $15 million note as
partial consideration for the assets sold to MSV, Motient recorded its share of
the MSV losses that had not been previously recognized by Motient ($17.5
million), having the effect of completely writing off the notes receivable in
2001.
16
Upon review, Motient determined that it should not have recorded any suspended
losses of MSV, since those losses should have been absorbed by certain of the
senior equity holders in MSV. As a result, Motient concluded that it should not
have written off its portion ($17.5 million) of the prior MSV losses against the
value of both notes in 2001.
Recording of increase in Motient's investment in MSV in November 2001. Also in
the November 2001 transaction, MSV acquired assets from another company, TMI, in
exchange for cash, a note and equity in MSV. Motient initially considered
whether or not a step-up in the value of its investment in MSV was appropriate
for the value allocated to TMI for its equity interest, and determined that a
step-up was not appropriate. Upon review, Motient determined that it should have
recognized a step-up in value of the MSV investment of $12.9 million under Staff
Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary",
with an offsetting gain recorded directly to shareholders' equity.
Recognition of gain on sale of assets to MSV in November 2001. Upon the
completion of the November 2001 transactions, Motient determined that 80% of its
gain from the sale of the assets should be deferred, since that was Motient's
equity ownership percentage in MSV at the time the assets were sold to MSV. Upon
review, Motient has determined that it was appropriate to apply Motient's
ownership percentage at the completion of all of the related transactions that
occurred on the same day as the asset sale transaction, since the transactions
were dependent upon one another and effectively closed simultaneously.
Accordingly, Motient should have deferred approximately 48% of the gain
(Motient's equity ownership percentage in MSV following the completion of such
transactions) as opposed to 80%. This change resulted in an increased gain on
the sale of MSV of $7.9 million in 2001.
Allocation of proceeds from the sale of the transportation business to Aether in
November 2000. Motient received approximately $45 million for the sale of its
retail transportation business assets and assumption of its liabilities to
Aether. This consisted of $30 million for the assets, of which $10 million was
held in an escrow account that was subsequently released in the fourth quarter
of 2001 upon the satisfaction of certain conditions, and $15 million for a
perpetual license to use and modify any intellectual property owned or licensed
by Motient in connection with the retail transportation business. In the fourth
quarter of 2000, Motient recognized a gain of $8.9 million, which represented
the difference between the net book value of the assets sold and the $20 million
cash portion of the purchase price for the assets received at closing. Motient
recognized an additional $8.3 million gain in the fourth quarter of 2001 when
the additional $10 million of proceeds were released from escrow. The $1.7
million difference between the proceeds received and the gain recognized is a
result of pricing modifications that were made at the time of the release of the
escrow plus certain compensation paid to former employees of the transportation
business as a result of the certain performance criteria having been met.
Motient deferred the $15 million perpetual license payment, which was then
amortized into revenue over a five-year period, the estimated life of the
customer contracts sold to Aether at the time of the transaction. Upon review,
Motient determined that the $15 million in deferred revenue should be recognized
over a four year period, which represents the life of a network airtime
agreement that Motient entered into with Aether at the time of the closing of
the asset sale. The decrease in the amortization period resulted in increased
revenue of $63,000 and $750,000 in 2000 and 2001, respectively.
Recognition of costs associated with certain options granted to Motient
employees who were subsequently transferred to Aether upon consummation of the
sale of Motient's transportation business to Aether in November 2000. Motient
valued the vested options based on their fair value at the date of the
consummation of the asset sale and recorded that value against the gain on the
sale of the assets to Aether. Upon review, Motient has determined to value these
17
vested options as a repricing under the intrinsic value method, with any charge
recorded as an operating expense. In addition, for each subsequent quarter for
which the unvested options continued to vest, Motient had valued these options
on a fair value basis and recorded any adjustment in value as an operating
expense. Upon review, Motient has determined that any adjustments in value
should have been reflected as an increase or reduction of the gain on the sale
of the assets to Aether. The revised accounting resulted in a reduction in
expenses of $0.8 million in 2000 and an increase in expenses of $1.0 million in
2001.
Summary of Adjustments to Prior Period Financial Statements as a result of
re-audit of years ended December 31, 2000 and 2001
The following is a brief description of the differences between Motient's
original accounting treatment and the revised accounting treatment that it has
concluded was appropriate and has been reflected in the accompanying financial
statements for the respective periods.
Recognition of difference between strike price and fair market value at
measurement date for options issued to ARDIS employees. Motient has restated its
consolidated financial statements to recognize compensation expense related to
the issuance of stock options with an exercise price below fair market value.
The revised accounting resulted in a decrease in net income and a corresponding
increase in additional paid in capital of $1.0 million, $0.6 million and $0.01
million for the years ended December 31, 1999, 2000 and 2001, respectively.
Recognition of adoption of SAB 101,"Revenue Recognition in Financial
Statements". Motient has restated its consolidated financial statements as of
January 1, 2000, based on guidance provided in Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", as amended. Motient's adoption of SAB No. 101 resulted in
a change of accounting for certain product shipments and activation fees. The
cumulative effect of the change to retained earnings as of January 1, 2000 was
$4.6 million. The cumulative effect was recognized as income in 2001 as the
amounts were amortized into revenue and ultimately recognized as additional gain
on the sale of the Company's satellite, transportation and certain other assets.
Accrual of advertising expense in December 2000. Motient has restated its
consolidated financial statements in 2000 to recognize an additional $1.1
million in advertising expense previously recognized in 2001.
Recognition of costs associated with inventory write-downs. Motient has restated
its consolidated financial statements in 2000 to recognize an additional $1
million in cost of goods sold for inventory write-downs previously recognized in
2001. In addition, Motient has restated its consolidated financial statements
for the three-months ended March 31, 2002 to recognize an additional $0.4
million in cost of goods sold for inventory write-downs not previously recorded.
Summary of Impact of the Restatement
The revised accounting treatment described above required that certain
adjustments be made to the income statement and balance sheet for the quarter
ended March 31, 2002. As a result of the adoption of fresh-start accounting, the
Successor Company periods ended September 30, 2002 were not restated. The effect
of these adjustments for the quarter ended March 31, 2002 is illustrated in the
table below for reference purposes. Certain of the adjustments are based on
assumptions that we have made about the fair value of certain assets.
18
Quarter Ended
March 31,
2002
----
(in thousands)
Statement of operations data
- ----------------------------
Net Revenue, as previously reported $16,495
Adjustments 188
---
As restated $16,683
=======
Net Operating Loss, as previously reported $(15,970)
Adjustments 208
---
As restated $(15,762)
=========
Net Loss, as previously reported $(32,885)
Adjustments (2,544)
-------
As restated $(35,429)
=========
Basic and Fully Diluted Loss Per Share of Common
Stock, as previously reported $(0.56)
Adjustments (0.05)
------
As restated $(0.61)
=======
Balance sheet data
- ------------------
Total Assets, as previously reported $177,628
Adjustments 27,654
------
As restated $205,282
========
Total Liabilities, as previously reported $485,681
Adjustments (14,122)
--------
As restated $471,559
========
Stockholders' Equity, as previously reported $(308,053)
Adjustments 41,776
------
As restated $(266,277)
==========
Total Liabilities & Stockholders' Equity, as
previously reported $177,628
Adjustments 27,654
------
As restated $205,282
========
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less at the time of
acquisition to be cash equivalents.
Short-term Investments
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and one year to be
short-term investments.
19
Inventory
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, is stated at the lower of cost or
market. Cost is determined using the weighted average cost method. The Company
periodically assesses the market value of its inventory, based on sales trends
and forecasts and technological changes and records a charge to current period
income when such factors indicate that a reduction to net realizable value is
appropriate. The Company considers both inventory on hand and inventory which it
has committed to purchase, if any.
Periodically, the Company will offer temporary discounts on equipment sales to
customers. The value of this discount is recorded as a cost of sale in the
period in which the sale occurs.
Concentrations of Credit Risk
For the nine months ended September 30, 2003, three customers accounted for
approximately 41% of the Company's service revenue, with two customers, United
Parcel Service of America, Inc. ("UPS") and SkyTel Communications, Inc.
("SkyTel"), each accounting for more than 14%. SkyTel accounted for
approximately 15% of the Company's accounts receivable at September 30, 2003.
For the four months ended April 30, 2002, five customers accounted for
approximately 44% of the Company's service revenue, with two customers, UPS and
SkyTel, each accounting for more than 10%. As of December 31, 2002 and April 30,
2002, Skytel represented 14% and 13%, respectively, of the Company's net
accounts receivable. For the five months ended September 30, 2002, five
customers accounted for approximately 47% of the Company's service revenue, with
two of those customers, UPS and SkyTel, each accounting for more than 10%, with
SkyTel accounting for approximately 12.4% of the Company's service revenue.
The revenue attributable to such customers varies with the level of network
airtime usage consumed by such customers, and none of the service contracts with
such customers requires that the customers use any specified quantity of network
airtime, nor do such contracts specify any minimum level of revenue. There can
be no assurance that the revenue generated from these customers will continue in
future periods.
Investment in MSV and Notes Receivable from MSV
The Company determined that certain adjustments to our historical financial
information for 2000, 2001 and 2002 were required to reflect the effects of
several complex transactions, including the formation of, and transactions with,
MSV. Please see "--Restatement of Financial Statements" and the Company's
current report on Form 8-K dated March 14, 2003 and its annual report on Form
10-K for the year ended December 31, 2002 for a complete discussion of such
adjustments.
The Predecessor Company had no basis in either its $15 million note receivable
from MSV or its $2.5 million convertible note receivable from MSV, as the
Company had fully written these off in 2001 through the recording of its equity
share of losses in MSV. It was determined that Motient should not have recorded
any suspended losses of MSV. As a result, it was concluded that Motient should
not have written off any prior MSV losses against the value of these notes.
As a result of the application of "fresh-start" accounting and the subsequent
modifications described below, the notes and investment in MSV were valued at
fair value and the Company recorded an asset in the amount of approximately
$53.9 million representing the estimated fair value of its investment in and
20
note receivable from MSV. Included in this investment is the historical cost
basis of the Company's common equity ownership of approximately 48% as of May 1,
2002, or approximately $19.3 million. In accordance with the equity method of
accounting, the Company recorded its approximate 48% share of MSV losses against
this basis.
Approximately $21.6 million of the $40.9 million value attributed to MSV is the
excess of fair value over cost basis and is amortized over the estimated lives
of the underlying MSV assets that gave rise to the basis difference. The Company
is amortizing this excess basis in accordance with the pro-rata allocation of
various components of MSV's intangible assets as determined by MSV through
recent independent valuations. Such assets consist of FCC licenses, intellectual
property and customer contracts, which are being amortized over a
weighted-average life of approximately 12 years.
Additionally, the Company has recorded the $15.0 million note receivable from
MSV, plus accrued interest thereon at its fair market value, estimated to be
approximately $13.0 million, after giving effect to discounted future cash flows
at market interest rates. This note matures in November 2006, but may be fully
or partially repaid prior to maturity, subject to certain conditions and
priorities with respect to payment of other indebtedness, in certain
circumstances involving the consummation of additional investments in MSV. In
April 2004, MSV repaid $2.0 million of interest and principal outstanding under
this note. For information regarding recent developments involving MSV, please
see Note 6 ("Subsequent Events").
In November 2003, Motient engaged CTA to perform a valuation of its equity
interests in MSV as of December 31, 2002. Concurrent with CTA's valuation,
Motient reduced the book value of its equity interest in MSV from $54 million
(inclusive of Motient's $2.5 million convertible note from MSV) to $41 million
as of May 1, 2002 to reflect certain preference rights on liquidation of certain
classes of equity holders in MSV. Including its note receivable from MSV ($13
million at May 1, 2002), the book value of Motient's aggregate interest in MSV
as of May 1, 2002 was reduced from $67 million to $53.9 million. Also, as a
result of CTA's valuation of MSV, Motient determined that the value of its
equity interest in MSV was impaired as of December 31, 2002. This impairment was
deemed to have occurred in the fourth quarter of 2002. Motient reduced the value
of its equity interest in MSV by $15.4 million as of December 31, 2002.
The valuation of Motient's investment in MSV and its note receivable from MSV
are ongoing assessments that are, by their nature, judgmental given that MSV is
not traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. While the
financial statements currently assume that there is value in Motient's
investment in MSV and that the MSV note is collectible, there is the inherent
risk that this assessment will change in the future and Motient will have to
write down the value of this investment and note. For information regarding
recent developments involving MSV, please see Note 6 ("Subsequent Events").
For the three and nine-month periods ended September 30, 2003, MSV had revenues
of $7.8 million and $22.2 million, respectively, operating expenses of $8.9
million and $22.4 million, respectively, and a net loss of $8.4 million and
$21.5 million, respectively. For the five-month period ended September 30, 2002
and four-month period ended April 30, 2002, MSV had revenues of $4.6 million and
$9.0 million, respectively, operating expenses of $3.8 million and $9.3 million,
respectively, and a net loss of $3.8 million and $9.2 million, respectively.
21
Deferred Taxes
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured. The Company has paid no income taxes since inception.
The Company has generated significant net operating losses for tax purposes
through September 30, 2003; however, it has had its ability to utilize these
losses limited on two occasions as a result of transactions that caused a change
of control in accordance with the Internal Revenue Service Code Section 382.
Additionally, since the Company has not yet generated taxable income, it
believes that its ability to use any remaining net operating losses has been
greatly reduced; therefore, the Company has established a valuation allowance
for any benefit that would have been available as a result of the Company's net
operating losses.
Revenue Recognition
The Company generates revenue principally through equipment sales and airtime
service agreements, and consulting services. In 2000, the Company adopted Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," issued by the SEC.
SAB 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB 101 requires the
deferral of the recognition of revenue and costs related to equipment sold as
part of a service agreement. Revenue is recognized as follows:
Service revenue: Revenues from wireless services are recognized when the
services are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period. The Company defers any revenue and costs associated with activation of a
subscriber on its network over an estimated customer life of two years.
Equipment and service sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public, and it also sells its
product directly to end-users. Revenue from the sale of the equipment, as well
as the cost of the equipment, are initially deferred and are recognized over a
period corresponding to the Company's estimated customer life of two years.
Equipment costs are deferred only to the extent of deferred revenue.
In December 2003, the Staff of the SEC issued SAB No.104, "Revenue Recognition",
which supersedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB
No. 104's primary purpose is to rescind accounting guidance contained in SAB No.
101 related to multiple-element revenue arrangements and to rescind the SEC's
"Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers" ("FAQ") issued with SAB No. 101. Selected portions of the FAQ have been
incorporated into SAB No. 104. The adoption of SAB No. 104 will not have a
material impact on the Company's revenue recognition policies.
22
Property and Equipment
Property and equipment are recorded at cost for the Predecessor Company and
adjusted for impairment, and include "fresh-start" adjustments for the Successor
Company. Property and equipment are depreciated over its useful life using the
straight-line method. Assets recorded as capital leases are amortized over the
shorter of their useful lives or the term of the lease. The estimated useful
lives of office furniture and equipment vary from two to ten years, and the
network equipment is depreciated over seven years. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over three years. Repairs and maintenance do not significantly increase the
utility or useful life of an asset and are expensed as incurred.
Property and equipment consists of the following:
September 30,
2003
----
Network equipment 53,033
Office equipment and furniture 3,907
Construction in progress 712
--------
57,652
Less accumulated depreciation and amortization (21,803)
--------
Property and equipment, net $35,849
========
The Company recorded depreciation expense for the three and nine months ended
September 30, 2003 of $3.5 million and $10.1 million, respectively. The Company
has assets under capital lease of $5.0 million at September 30, 2003. In May
2004, the Company engaged a financial advisory firm to prepare a valuation of
customer intangibles as of September 2003. Due to the loss of UPS as a core
customer in 2003 as well as the migration and customer churn occurring in the
Company's mobile internet base that is impacting the average life of a customer
in this base, among other things, the Company determined an impairment of the
value of these customer contracts was probable. As a result of this valuation,
the value of customer intangibles was determined to be impaired as of September
2003 and was reduced by $5.5 million
Research and Development Costs
Research and development costs are expensed as incurred. Such costs include
internal research and development activities and expenses associated with
external product development agreements.
Advertising Costs
Advertising costs are charged to operations in the year incurred.
Stock-Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion
No.25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
23
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No.123", which provides optional transition guidance for those companies
electing to voluntarily adopt the accounting provisions of SFAS No. 123. In
addition, SFAS No. 148 mandates certain new disclosures that are incremental to
those required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No. 25.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Predecessor
Successor Company Company
----------------- -------
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Net loss, as reported $(22,345) $(16,644) $(47,749) $(29,654) $231,978
Add: Stock-based employee
compensation expense included in net
income, net of related tax effects 76 --- 1,217 --- ---
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of tax related effects (252) (283) (2,025) (283) (57)
----- ----- ------- ------ -------
Pro forma net loss $(22,521) $(16,927) $(48,557) $(29,937) $231,921
Weighted average common shares
outstanding 25,170 25,097 25,128 25,097 58,251
Earnings per share:
Basic and diluted---as reported $(0.89) $(0.66) $(1.90) $(1.18) $3.98
Basic and diluted---pro-forma $(0.89) $(0.67) $(1.93) $(1.19) $3.98
Under SFAS No. 123 the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
Predecessor
Successor Company Company
----------------- -------
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Expected life (in years) 9 10 9 10 10
Risk-free interest rate 1.11% 1.71% 1.11% 1.71% 1.71%
Volatility 156% 173% 156% 173% 197%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
24
Options to purchase 1,631,025 shares and 1,787,900 shares of the Company's
common stock were outstanding at September 30, 2002 and 2003, respectively,
under the Company's 2002 Stock Option Plan. Options to purchase 2,683,626 shares
of the Predecessor Company's stock were outstanding at April 30, 2002. These
options were cancelled as part of the Company's reorganization.
In March 2003, the Company's board of directors approved the reduction in the
exercise price of all of the outstanding stock options from $5.00 per share to
$3.00 per share. The repricing requires that all options be accounted for in
accordance with variable plan accounting, under which the value of these options
are measured at their intrinsic value and any change in that value is charged to
the income statement each quarter based on the difference (if any) between the
intrinsic value and the then-current market value of the common stock. The other
options are accounted for as a fixed plan and in accordance with intrinsic value
accounting, which requires that the excess of the market price of stock over the
exercise price of the options, if any, at the time that both the exercise price
and the number of options are known be recorded as deferred compensation and
amortized over the option vesting period. For the three and nine months ended
September 30, 2003, the Company recorded a mark-to-market adjustment of $0.1
million and $1.2 million respectively relating to these re-priced options.
In July 2003, the compensation and stock option committee of the Company's board
of directors, acting pursuant to the Company's 2002 stock option plan, granted
26 employees and officers options to purchase an aggregate of 470,000 shares of
the Company's common stock at a price of $5.15 per share. In September 2003, one
additional employee received a grant for 25,000 shares of the Company's common
stock at a price of $5.65 per share. One-half of each option grant vests with
the passage of time and the continued employment of the recipient, in three
equal increments, on the first, second and third anniversary of the date of
grant. The other half of each grant will either vest or be rescinded based on
the performance of the Company in 2004. If vested and not exercised, the options
will expire on the 10th anniversary of the date of grant.
Segment Disclosures
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company had one operating segment: its core
wireless business. The Company provides its core wireless business to the
continental United States, Alaska, Hawaii and Puerto Rico. The following
summarizes the Company's core wireless business revenue by major market
categories:
25
Predecessor
Successor Company Company
----------------- -------
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $6.8 $5.5 $21.7 $8.9 $5.6
Field services 1.9 4.0 7.9 6.9 5.6
Transportation 1.1 2.8 7.0 4.5 4.1
Telemetry 0.6 0.6 1.8 1.0 0.8
Maritime and other 0.3 0.1 0.4 0.2 0.7
--- --- --- --- ---
Service revenue $10.7 13.0 $38.8 21.5 16.8
Equipment revenue 1.4 0.3 3.2 0.5 5.6
--- --- --- --- ---
Total $12.1 $13.3 $42.0 $22.0 $22.4
===== ===== ===== ===== =====
The Company does not measure ultimate profit and loss or track its assets by
these market categories.
(Loss) Income Per Share
Basic and diluted (loss) income per common share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
Options and warrants to purchase shares of common stock were not included in the
computation of loss per share as the effect would be antidilutive for all
periods. As a result, the basic and diluted earnings per share amounts for all
periods presented are the same. As of September 30, 2003, there were warrants to
acquire approximately 5,664,962 shares of common stock and options outstanding
for 1,787,900 shares that were not included in this calculation because of their
antidilutive effect for the nine months ended September 30, 2003. For the four
month period ended April 30, 2002, all options and warrants had exercise prices
in excess of the fair market value of the Company's common stock, and thus
options and warrants were not factored into the per share calculation. As of
September 30, 2002, there were warrants to acquire approximately 1,839,962
shares of common stock and options outstanding for 1,621,975 shares that were
not included in this calculation because of their antidilutive effect for the
five months ended September 30, 2002.
New Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
26
modified after December 31, 2002 irrespective of the guarantor's fiscal year
end. The disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. Motient does not
have any guarantees that would require disclosure under FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years beginning after
December 15, 2002. We have adopted the disclosure requirements of SFAS No. 148
as of January 1, 2003 and plan to continue to follow the provisions of APB
Opinion No. 25 for accounting for stock based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51," which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 provides guidance related to identifying
variable interest entities (previously known generally as special purpose
entities, or SPEs) and determining whether such entities should be consolidated.
FIN No. 46 must be applied immediately to variable interest entities created or
interests in variable interest entities obtained, after January 31, 2003. For
those variable interest entities created or interests in variable interest
entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must
be applied in the first fiscal year or interim period beginning after June 15,
2003. The Company has reviewed the implications that adoption of FIN No. 46
would have on our financial position and results of operations and does not
expect it to have a material impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has determined that it does not have any financial instruments
that are impacted by SFAS No. 150.
Related Parties
The Company made payments of $208,000 to related parties for
service-related-obligations for the nine-month period ended September 30, 2003,
as compared to no payments made in the four month period ended April 30, 2002
and $408,000 in the five-month period ended September 30, 2002. As of September
30, 2003, the Company had a net due from related parties in the amount of $0.1
million.
CTA is a consulting and private advisory firm specializing in the technology and
telecommunications sectors. It had previously acted as the spectrum and
technology advisor to the official committee of unsecured creditors in
connection with the Company's bankruptcy proceedings. In May 2002, the Company
entered into a consulting agreement with CTA under which CTA provided consulting
services to the Company. Since September 2002, the Company has extended it
27
consulting agreement with CTA on either three month or month-to-month terms. For
the period September 2002 to May 2003, the monthly fee was $55,000. Beginning in
May 2003, the monthly fee was reduced to $39,000. This agreement was amended,
and the engagement and related payment was modified on January 30, 2004.
On June 20, 2003, Jared Abbruzzese, the chairman of CTA, resigned his position
as Chairman of the Board and Peter D. Aquino, a senior managing director of CTA,
was elected to the Company's Board on June 20, 2003.
On July 29, 2003, Motient entered into a letter agreement with Further Lane
Asset Management Corp. under which Further Lane provides investment advisory
services to Motient. In connection with the execution of this letter agreement,
Motient issued Further Lane a warrant to purchase 200,000 shares of its common
stock. The exercise price of the warrant is $5.10 per share. The warrant is
immediately exercisable upon issuance and has a term of five years. The fair
value of the warrant was estimated at $927,000 using a Black-Scholes model. In
September 2003, the Company recorded a non-cash consultant compensation charge
of $927,000 based on this valuation.
See Note 6 ("Subsequent Events") for further discussion of other subsequent
related party transactions.
3. LIQUIDITY AND FINANCING
Liquidity and Financing Requirements
In January 2002, the Company and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. The Company's Plan of Reorganization was confirmed on April 26,
2002 and became effective on May 1, 2002. After confirmation of the plan,
Motient had approximately $30.7 million of debt, comprised of capital leases,
notes payable to Rare Medium and CSFB and a vendor financing facility with
Motorola, Inc. ("Motorola").
Since emerging from bankruptcy protection in May 2002, the Company has
undertaken a number of actions to reduce its operating expenses and cash burn
rate. Despite these initiatives, the Company continues to be cash flow negative,
and there can be no assurances that Motient will ever be cash flow positive. For
a description of the Company's significant cost reduction initiatives after the
end of the period covered by this report, please see Note 6 ("Subsequent
Events").
The Company's liquidity constraints have been exacerbated by weak revenue growth
since emerging from bankruptcy protection, due to a number of factors including
the weak economy generally and the weak telecommunications and wireless sector
specifically, the financial difficulty of several of the Company's key
resellers, on whom the Company relies for a majority of its new revenue growth,
the loss of UPS as a primary customer, the loss of mobile internet customers due
to churn, the end of life notification with regards to RIM 857 customer devices
and migration of customers to next-generation technologies not carried on
Motient's network, and the Company's continued limited liquidity which has
hindered efforts at demand generation.
In addition to cash generated from operations, the Company holds a $15 million
promissory note issued by MSV in November 2001. This note matures in November
2006, but may be fully or partially repaid prior to maturity, subject to certain
conditions and priorities with respect to payment of other indebtedness, in
certain circumstances involving the consummation of additional investments in
28
MSV. Under the terms of the Company's $19.75 million of notes issued to Rare
Medium and CSFB in connection with its Plan of Reorganization, in certain
circumstances the Company must use 25% of any proceeds from the repayment of the
$15 million note from MSV to repay the Rare Medium and CSFB notes, on a pro-rata
basis. For a discussion of certain recent developments regarding MSV, please see
Note 6 ("Subsequent Events"). There can be no assurance that the MSV note will
be repaid prior to maturity, or at all.
The Company's future financial performance will depend on its ability to
continue to reduce and manage operating expenses, as well as its ability to grow
revenue. The Company's future financial performance could be negatively affected
by unforeseen factors and unplanned expenses.
The Company continues to pursue all potential funding alternatives. Among the
alternatives for raising additional funds are the issuance of debt or equity
securities, other borrowings under secured or unsecured loan arrangements, and
sales of assets. There can be no assurance that additional funds will be
available to the Company on acceptable terms or in a timely manner. The
Company's credit facility also has certain terms and conditions, subject to
limits and waivers, that restrict the Company's ability to issue additional debt
securities and use the proceeds from the sale of assets. The stock purchase
agreement executed by the Company and certain purchasers of its common stock in
April 2004 also limits Motient's ability to raise capital in the future. There
can be no assurance that these restrictions will be waived or modified to allow
the Company to access additional funding. For additional information, please see
Note 6 ("Subsequent Events").
The Company's projected cash requirements are based on certain assumptions about
its business model and projected growth rate, including, specifically, assumed
rates of growth in subscriber activations and assumed rates of growth of service
revenue. While the Company believes these assumptions are reasonable, these
growth rates continue to be difficult to predict and there is no assurance that
the actual results that are experienced will meet the assumptions included in
the Company's business model and projections. If the future results of
operations are significantly less favorable than currently anticipated, the
Company's cash requirements will be more than projected, and it may require
additional financing in amounts that will be material. The type, timing and
terms of financing that the Company obtains will be dependent upon its cash
needs, the availability of financing sources and the prevailing conditions in
the financial markets. The Company cannot guarantee that additional financing
sources will be available at any given time or available on favorable terms.
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The successful implementation of
the Company's business plan requires substantial funds to finance the
maintenance and growth of its operations, network and subscriber base and to
expand into new markets. The Company has an accumulated deficit and has
historically incurred losses from operations which are expected to continue for
additional periods in the future. There can be no assurance that its operations
will become profitable. These factors, along with the Company's negative
operating cash flows have placed significant pressures on the Company's
financial condition and liquidity position.
Debt Obligations & Capital Leases
The following table outlines the Company debt obligations and capital leases as
of September 30, 2003.
29
Successor Company
(Unaudited)
September 30, 2003
------------------
(in thousands)
Rare Medium note payable due 2005, $21,531
including accrued interest thereon
CSFB note payable due 2005, 850
including accrued interest thereon
Vendor financing 5,034
Term Credit Facility 4,664
Obligations under Capital Leases 4,134
-----
36,213
Less current maturities 3,051
-----
Long-term debt $33,162
-------
The following table reflects the maturity of these obligations over the next
five years.
Less then After 5
Total 1 year 1-4 years years
----- ------ --------- -----
(in thousands)
Notes Payables $22,381 $-- $22,381 $--
Term Credit Facility 4,664 -- 4,664 --
Capital lease obligations, including interest thereon 4,134 2,031 2,103 --
Vendor financing commitment 5,034 1,020 4,014 --
----- ----- ----- -----
Total Contractual Cash Obligations $36,213 $3,051 $33,162 --
Rare Medium Note: Under the Company's Plan of Reorganization, the Rare Medium
notes were cancelled and replaced by a new note in the principal amount of $19.0
million. The new note was issued by a new subsidiary of Motient Corporation that
owns 100% of Motient Ventures Holding Inc., which owns all of the Company's
interests in MSV. The new note matures on May 1, 2005 and carries interest at
9%. The note allows the Company to elect to accrue interest and add it to the
principal, instead of paying interest in cash. The note requires that it be
prepaid using 25% of the proceeds of any repayment of the $15 million note
receivable from MSV. Please see Note